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China Investment Scams – Now More Sophisticated And Less Detectable. Welcome to China’s Creative Investment Frauds…

Only five years ago, it was fairly easy to spot a Chinese investment fraud after only a few dozen victims told their stories. The red flags were easy to spot… unsolicited business contact from a prospective Chinese partner or investor, invitations to visit China, quick and easy negotiations, etc. Within a year scam warnings were being flashed and posted all over the internet and so the Chinese fraudsters had to get creative and they did.

They began recruiting scam team members abroad in the West to bird-dog for them and to present themselves as nephews and cousins of “very wealthy and corrupt” investors and government officials in China. Many use photo-shopped photos of themselves with past and presents Chinese leaders at the deputy minister level and above, and leased luxurious office spaces in New York, Beverly Hills, London, etc. The appearance of wealth is everywhere yet it is fabricated – all part of a big well-produced and directed show.

They target western project developers who are already actively seeking EB5 investments in the west – also known as the “immigration by investment program” since these people rarely need to be sold on China’s excessive wealth. Once a target is selected they will get a casual call or an email expressing a “mild interest” in their project an request an executive summary. A second call will follow within two weeks suggesting “a friend from China” will be visiting and has requested a preliminary meeting. A complete name for the fiend will never be provided. They will say “Mr. Liu, Mrs. Zhang, or a Mr. Chen” a longtime associate for example which narrows it down to a field of about 50 million people who all share that family name. But they will curb their enthusiasm and remain low key – unlike previous scammers who would puff up the importance of the Chinese contact.

Upon arrival, the Chinese visitor will shun any public appearance at a restaurant and always insist on a private meeting. At that time they will insist that mutual non-disclosure agreement with huge monetary penalties be signed before proceeding further and the agreements are produced and signed.

Now the great fairy tale unravels… Mr. Liu represents two or three corrupt generals or Chinese officials who want to get their dirty money out of China since it cannot be deposited in any bank. They are looking for an investment vehicle that will launder their money and allow 10% of the millions to be directed into the actual investment. The mark has no clue the meeting is being secretly recorded. Of course they will not use their real names on any contracts and documents and so long as they continue to launder the funds, the investment dollars will continue. Perhaps photos like the one below will be shown to document the “cash” problem they have.

The catch is that they must use a Beijing company as an intermediary agent to provide third party deniability for all parties concerned. One such company is called ZERO TO IPO in Beijing, which runs a few unrelated scams of their own as well. Now, the foreigner is invited to come to China “at his convenience” when they are ready to do business. There is no pressure or rush as other previous Chinese scams. Zero To IPO is just one of over a hundred such scams operating in Beijing and twice as many are operating out of Shanghai. If our small team of three volunteers can find them, rest assured the authorities know who they are as well. We spotted Zero to IPO in less than an hour after our unscheduled walk-in to their office generated near panic and one employee grabbed a box of documents and ran out a side door and another began shredding. When we asked to speak to the “Managing Director” we were asked by the naïve receptionist “which one?” When I replied I could not remember Chinese names very well and I think it was Mr. Li, she replied, “Sorry, there is no Li on the list”. So at this point I gathered up a handful of business cards that were in the conference room that I ducked into while pretending to be looking for the wash room. Note below that this Zero To IPO company does not have a Managing Director. They have 9 of them! In some countries this is illegal and in most others – unheard of.

Back to our little scam story… Once in China, the mark is wined and dined for a day or two before being told that “the General” wants to meet the man he is trusting his money to”. A dramatic and secret meeting is arranged at a tea house. The General will always be waiting in some private room but never in a uniform, although photos of him in a uniform will be shown at some point. Again the meeting will be secretly recorded. After a short 30 minute meeting the general will get “an urgent call” and leave with a veiled threat “I am trusting you with a small amount first, but if anything goes wrong, I am holding you personally accountable”. The translator reluctantly does his job, the general shakes the mark’s hand and exits the room to attend to his fabricated emergency.

Now the intermediary agent explains the procedure that a Hong Kong company will use $5 million of cash to buy shares in some successful Shanghai listed company in the name of the foreign project and once the shares are in hand the mark must pay a $500,000 facilitation fee to the intermediary company to handle the entire process which is secured by the shares. Since there appears to be no risk, the mark usually agrees. If he hesitates, he will be driven to a luxury home wearing a blindfold, and led into a room that will have about 5-10 pallets of cash wrapped in plastic to convince him that his $500,000 is nothing compared to what awaits if he cooperates. He is then told that they want to move $10 million a month. By now, the hesitation has been replaced with greed. The mark usually agrees and then is asked to remain in China for another day or two while the shares are procured.

“Because of the Snowden thing, don’t dare send an email or talk with anyone on the phone about this” the mark is told as he is reminded that money laundering is against the law in both China and America, but at least in China, you can buy your way out of a problem if you are caught. In 2 or 3 days, the stock shares are produced (excellent counterfeits that are virtually undetectable). They are shown to the mark and he is told he can hold half of them until the money is wired in and then he will get the balance of the certificates. He has no objections.

The $500,000 facilitation fee is wired into an account set-up only days before especially for this scam by a ghost account holder. The mark is now given the balance of his shares and told “Do not sell these for at least 30 days or you will set off alarm bells and we suggest you sell no more than $1 million at a time.” The mark is elated and is told to return to Beijing in 45 days to do the next and monthly transactions which will be $10 million each.

Eventually the mark learns he was duped and the stock certificates are great fakes. If he calls or returns to protest or request a refund, he is played the recordings and told that if any problems are made the recordings will be sent to the authorities. Choosing between a $500,000 loss or a potential 20 year prison sentence, incredible embarrassment, and hefty legal fees, you can guess how this story ends.

There are many variations to this scam and some even involve some drunken affair arranged with a local prostitute as added insurance of the victim’s silence. But each score is for a minimum of at least $500,000 and as high as $3 million. No CEO wants to admit they were taken in by such a scam and usually cover up the entire ordeal.